The Secret World of Bullion Banking: Who Sets Gold Prices?

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The financial sector has never been known for its transparency or forthrightness. In fact, it’s probably the single most mysterious industry there is. Bullion banking is so shrouded in secrecy that even most bankers don’t understand it. Recently, bullion bankers have come under fire for allegedly dishonestly fixing gold and silver prices. Whether or not the allegations are true, the ongoing investigation into bullion banking has led to some surprising discoveries about the industry. The question raised by the investigation is whether or not some bullion bankers are playing by the rules.

Bullion Banking: The Basics

To put it in terms everyone can understand, bullion banking is the trading of precious metals as commodities. Bullion is incredibly expensive to store and insure, so the central banks that hold bullion bars are indispensable. Since bullion is a heavily traded commodity, these central banks are relied on to properly account for the bullion, and they, in turn, help set the prices.

Gold prices are set by what’s known as “The London Gold Fix.” Twice each business day, five members of The London Gold Market Fixing Ltd. meet to determine gold trading prices, which are known as “benchmarks.” The five bankers each represent one of the five biggest bullion banks in London. The prices established by these bankers help determine gold prices internationally. Unfortunately, this fixing ritual, among others, is under scrutiny.

The Allegations and Investigations

Last November, the UK’s Financial Conduct Authority (FCA) began investigating the five bullion banks involved in The London Gold Fix: Sociét é Générale, Barclays, Deutsche Bank, HSBC, and Scotiabank. The investigation into all benchmark prices for precious metals arises from scrutiny not only in the UK, but in Asia and the U.S. as well.

In the beginning of 2014, after only two months of being under investigation, Germany’s largest bank, Deutsche Bank, stepped down from gold and silver price setting. A month before this announcement, Germany’s financial regulator BaFin, demanded documents that were believed to hold key information about silver and gold price setting. In a statement to the public, Deutsche Bank claimed they stepped down because they were “scaling back their commodities” investments. The European investigation is still underway. No other banks have stepped down.

In the beginning of April, the FCA announced that the investigation into the precious metals market would be a top priority for the next 12 months. Part of the investigation will be to look into ways to prevent this kind of market manipulation from happening altogether. Martin Wheatley, who is the chief executive of the FCA, spoke about the investigation.

"Over the next year we will increase the intensity with which we supervise wholesale conduct to ensure that transactions undertaken by these firms do not have a harmful impact on market integrity," Wheatley stated.

Unveiling the Secrecy in Bullion Banking

Precious metals buyers and sellers all over the world base their prices on what these bankers come up with twice a day. So the actions of these five bankers in London have far-reaching effects. Even the slightest manipulation of these prices would have a huge international impact. Undoubtedly, the financial world will be following these proceedings closely.

Bellevue Rare Coins specializes in gold buying and dealing in rare coins. We are a family-owned business located in Bellevue and Lynnwood. We also buy and sell silver, diamonds, currency and jewelry. Visit us for a free evaluation.